With growing concerns about the environmental and social impacts of businesses, sustainability reporting standards have become paramount in ensuring transparency and accountability. The European Union took a significant step in this direction in 2014 with the adoption of the Non-Financial Reporting Directive (NFRD), which aimed to enhance non-financial disclosures for certain large companies listed on EU-regulated markets.
However, recognizing the need for further improvements and expansion of reporting requirements, the NFRD was replaced by the Corporate Sustainability Reporting Directive (CSRD) in March 2021.
This article covers:
- What is NFRD?
- Who does NFRD Apply To?
- The Importance of NFRD
- The Limitations of NFRD
- Why NFRD Replaced CSRD?
- The Key Differences Between CSRD and NFRD
It explains NFRD and CSRD, highlighting their objectives, key differences, and how they shape sustainability reporting for companies, with a focus on the aviation sector.
What is NRFD?
The Non-Financial Reporting Directive (NFRD) was adopted by the European Union in 2014 to increase transparency and accountability of corporates on non-financial issues such as environmental performance, social themes, and governance. The Non-Financial Reporting Directive (NFRD) exclusively targets public-interest entities (PIEs) encompassing listed companies, banks, and insurance companies, which employ over 500 individuals. These entities are obligated to provide non-financial disclosure reports alongside their annual reports.
Who does NFRD Apply To?
The NFRD applies to public-interest entities (PIEs) with over 500 employees. This includes large EU listed entities, credit institutions, insurance companies, and other entities designated as such by an EU member state. In total, approximately 11,000 entities in the EU fall under the scope of NFRD
The Importance of NFRD
The NFRD is crucial for measuring and managing companies’ societal impact.
It influences investor and consumer decision-making, covering various sectors including listed companies, banks, and insurance companies.
The Limitations of NFRD
The NFRD has limitations, including lack of comparability, reliability, and relevance of non-financial information provided, vague legislation from political compromises, and limited enforcement due to unspecified requirements.
Why was NFRD Replaced by CSRD?
The Non-Financial Reporting Directive (NFRD) was replaced by the Corporate Sustainability Reporting Directive (CSRD) in November 2022 due to its limitations.
As the EU recognized the need for more robust reporting requirements and the necessity to broaden the scope of companies to which the legislation applied.
The Key Differences Between NRFD and CSRD
- Scope: The CSRD expands the scope of the reporting requirements from approximately 12,000 entities under the NFRD to approximately 50,000 entities.
- Reporting requirements:
- NFRD: Required reporting on environmental protection, social responsibility, employee relations, board diversity, and respect for human rights.
- CSRD: Introduces more comprehensive reporting obligations, including the double materiality concept, long-term ESG objectives, due diligence on operations and supply chains, disclosure of intangible information, alignment with sustainable finance regulations, and mandatory external assurance.
- Harmonized Reporting Standards:
- NFRD: Allowed companies to choose from different reporting frameworks, resulting in a lack of unified standards.
- CSRD: Aligns with the European Sustainability Reporting Standards (ESRS), providing a common set of guidelines and requirements for reporting under the framework.
- External Assurance:
- CRSD: External assurance is mandatory.
- NFRD: External assurance was optional.
- Digital Reporting:
- NFRD: No specific requirement for standardized digital reporting.
- CSRD: requires companies to format and publish their sustainability reports using a standardized digital format, promoting accessibility and comparability.
The replacement of the Non-Financial Reporting Directive with the Corporate Sustainability Reporting Directive represents a major leap forward in enhancing sustainability reporting practices in the European Union. By broadening the scope of reporting obligations and introducing more comprehensive requirements, the CSRD is set to drive transparency, accountability, and responsible practices.
Navigate CSRD compliance with PACE today
PACE is your global software platform and customer success partner, helping aviation stakeholders meet CSRD reporting obligations (NFRD’s successor). We transform carbon insights into strategic assets, enabling growth, managing risks, and promoting CO2 reduction in line with evolving EU reporting standards.